"Oh No, Mr. Bill!"

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"Oh No, Mr. Bill!"

The inside story of the antitrust case against Microsoft.

Anne Bingaman had just crossed around Janet Reno's desk, flung her arms about the attorney general, and squeezed. She had Reno in the grip of one of her famous bear hugs. The rest of the staff stood in awe and kept a polite distance. These were towering figures: the Justice giantesses. Reno is nearly 6'2", but some in the room noticed that antitrust titan Bingaman somehow managed to envelope her.

It was a December morning at the DOJ. The staff meeting had begun as usual: at 8 am every Tuesday. All the bigwigs were present, and no one was overly surprised to see Anne Bingaman - known to be direct, demonstrative, and aggressive - being so familiar with the attorney general.

That's not to say that Reno and Bingaman always agreed. Well into the meeting, Bingaman engaged in a heated argument with her mentor - about a certain ambiguous ethical rule. "Janet didn't expect to get an argument from anyone but Anne," said one staffer present at the meeting. Bingaman wanted her staff to be able to cut through the bureaucracy. In short, she wanted action. And Bingaman was usually one to get it. She had only recently set in motion a major reorganization of the antitrust division, one that would see the unit emerging from the long slumber that began in the '80s, when, after the AT&T breakup, the Reagan administration essentially pulled the plug on antitrust enforcement.

As Bingaman and Reno wrangled on this December morning, the groundwork was being laid for a federal antitrust injunction against Microsoft Corp. After a long and meandering investigation that had begun back in 1989 at the Federal Trade Commission, Bingaman was about to give Microsoft Chairman Bill Gates one of her famous bear hugs - this time in the form of an antitrust suit.

Mitchell Kapor, founder of Lotus Development Corp. and now chair of the Electronic Frontier Foundation, once said that Bill Gates wants nothing more than to be the Rockefeller of the Information Age. If that's true, Anne Bingaman just might be his trust-busting Teddy Roosevelt.

By March or April of 1994, sources close to the case said, Bingaman's antitrust deputies will call Bill Gates into their DC offices under the threat of a very public, and very viable, antitrust lawsuit. There they will give Gates a chance to nip the case in the bud by signing a consent order that would force Microsoft to stop a range of alleged predatory practices. If he refuses (and Bill does not have a track record of bowing to government pressure), the Microsoft case may well join AT&T and IBM in the antitrust hall of fame.

According to government sources and documents, Washington attorneys, and witnesses close to the case, Bingaman's staff has found substantial evidence suggesting that Microsoft has violated the Sherman and Clayton acts, the most basic of antitrust laws. (Most sources interviewed for this story would not go on the record.)

Toward the end of January 1994, sources said, DOJ insiders were scurrying to have the case ready to file by early April, just before the much-vaunted annual spring meeting of the antitrust section of the American Bar Association in Washington.

(Historically, the Supreme Court has timed its rare antitrust opinions right before this early spring antitrust powwow. "When the Supreme Court has an antitrust case they always try and get it announced the week before so the bar can kind of chew on it at this spring meeting. The DOJ wants to do the same," said a Washington attorney working on the Microsoft case.)

Bingaman had just hired Sam "Ziggy" Miller, a trial lawyer from the San Francisco law firm of Morrison & Foerster, specifically to head up litigation for the Microsoft case. While the case could be filed anywhere in the US, sources said it would most likely be filed in the US District Court for the Northern District of California, the jurisdiction including Silicon Valley and most convenient to the numerous parties that would be called as witnesses.

A public announcement of the first major monopoly case in more than a decade - right before the prestigious ABA event - would be sure to have the nation buzzing, and Bingaman would be recognized for heralding in a new era in antitrust enforcement. While declining to comment on the specifics of the case, Andrew Berg, an attorney who represents Lotus Development Corp., acknowledged that "more and more people have been put on the case, as the evidence has proved to be substantial. We hope to see some action in early spring."

After years of testimony and thousands of pages of evidence, an entire industry is perched in anticipation of the DOJ's action. The outcome of the case would have the potential to affect not only Microsoft's behavior in emerging markets, but also the future viability of smaller digital players in the marketplace, and the variety and cost of computer products available to consumers. Moreover, the case promises to set a standard by which future antitrust cases in high-tech industries would be weighed.

Either by forcing Microsoft to sign a consent order, or through a successful law-suit, the case could dramatically alter the competitive landscape.

"(Microsoft) uses the OS as the locomotive to pull a whole train of products through the market," said Bill Bluestein, director at Forrester Research Inc., a Cambridge, Massachusetts, market research firm. "What this will do is weaken Microsoft's ability to set the standard in the industry. They'll have to truly compete... It would end a lot of the funny business that people allege Microsoft engages in."

Bingaman's relationship with Reno will be critical to the antitrust chief's ability to accomplish her goals. Indeed, the financial and philosophical support of both the attorney general and the Clinton administration has proven essential to the emergence of what promises to be the most important antitrust case since the breakup of AT&T in the mid '80s.

The remedies sought in the Microsoft case, however, would be vastly different from those in the landmark AT&T case. Largely because of the government's experience with the drawn-out antitrust suits against AT&T and IBM (the former successful, the latter not), so-called "structural" cases which attempt to breakup a company would still be avoided like the plague. "The DOJ almost has a genetic memory of these cases, which consumed enormous time and resources, and so stays clear of remedies that point to a split-up," said Robert Pitofsky, a key Clinton antitrust advisor who served on the president's transition team. (The epic IBM case severely distracted the computer giant as it battled the Justice Department from 1969 to 1982.)

Instead, the case against Microsoft would be approached with surgical precision, focusing on relief through very specific changes in the company's software licensing policies and other business practices deemed to be anti-competitive. If a consent order is finalized, Microsoft would soon afterwards have to file a compliance report stating what it has done to comply, and it probably would have to submit annual reports thereafter. Should an order be signed, its particulars will be enforced by a DOJ regulator, who will have the right to review any and all Microsoft practices relating to the decree. Any violation of that decree would constitute contempt of court, resulting in fines, and, in extreme cases, jail time for Microsoft officers. And nothing is ever straightforward - if Gates refuses to sign and the DOJ files its case, it is probable that Microsoft will request a summary judgment throwing it out.

But attorneys close to the case say that tactic won't fly. "This is a clean, tryable case," said an attorney working on the case who asked to remain anonymous. "Justice does not want to get involved in another land war in Asia with the computer industry. The only group that was stung by the IBM case more than IBM was Justice. This Microsoft suit will not be a repeat of IBM."

The Case

Bingaman stuck her neck out last August when she made the unprecedented and very public move of taking over the Federal Trade Commission's deadlocked case against Microsoft. (The case had deadlocked twice because of the recusal of one of the FTC's voting commissioners.) The antitrust chief would not be risking such a high-profile case if she did not feel there was substantial evidence of illegal conduct, her colleagues said.

What has Microsoft done to merit being the subject of the first serious monopolization case in more than a decade? Having a monopoly in and of itself is not illegal, and some lobbyists on Microsoft's behalf protested that the government was merely taking potshots at a global star. Indeed, antitrust law spells out that a monopolist may not be doing anything wrong if, having obtained market power by legitimate means, it maintains its power by possessing superior skill, foresight, and reasonable industrial practices.

Monopolization is illegal if it can be proved that a company has a specific "intent" to monopolize and a "dangerous probability" of success; or if a monopoly has already been achieved and has been maintained through anti-competitive or predatory conduct. According to DOJ sources, Bingaman's staff felt it did not have to go far afield to prove that the most basic of antitrust violations had been committed. Microsoft, of course, feels differently. "Microsoft has not engaged in any conduct that is even arguably in violation of the antitrust laws and intends to defend itself vigorously against any claim to the contrary," said William Neukom, senior vice president of law and corporate affairs, in a statement prepared for this story.

"Microsoft does not agree that it is 'in a position of immense power' in the software industry," Neukom continued, quoting one of WIRED's questions. "In our experience, such assertions typically are made by disgruntled competitors who are angry because Microsoft competes forcefully against them in developing and marketing quality software products. Microsoft's responsibility, however, is to keep its customers happy. Our efforts in that regard may have an opposite effect on Microsoft's competitors."

Perhaps, but long-standing antitrust law clearly prohibits anti-competitive conduct, and it spells out particular behavior that constitutes restraint of trade. The Sherman and Clayton Acts, enacted in 1890 and 1914, respectively, prohibit conspiracy to monopolize, illegal "tying" of product sales (between operating systems and applications, in Microsoft's case), and "exclusive dealing" that locks competitors out of a marketplace ("per processor" licensing schemes, in Microsoft's case).

In legal documents presented to the DOJ, Washington attorneys representing Microsoft's competitors argue that the long-term viability in the operating-systems market requires that entrants be allowed to reach what in antitrust terms is called "minimum viable scale," or, as the competitors put it, "a minimum market share threshold necessary both to sustain required ongoing investment and to recover the significant sunk cost of entry."

As long as entrants are kept below that threshold, the attorneys argue, their ability to survive and compete is greatly hindered. With full understanding of this, Microsoft - according to its competitors - has engaged in a systematic campaign of anti-competitive practices to prevent competing operating systems from reaching that threshold.

Industry software developers have also provided evidence to the DOJ, under subpoena, that Microsoft's monopoly power in operating systems, and the related interface specifications for those operating systems, gives it control over a "technological bottleneck" through which nearly all the other participants in the entire PC hardware and software industry must pass.

"If the government takes appropriate action, what will result is greater competition in the market resulting in lower prices and a broader set of products for the consumer," said David Bradford, chief counsel for Novell Inc.

The DOJ's formal charges against Microsoft will comprise a long laundry list of behavior in both the operating systems and application software markets, sources said. Competitors such as Lotus, Novell, Borland, Taligent, Sun Microsystems, and WordPerfect have, in sworn testimony to DOJ investigators, charged Microsoft with exclusive dealing, predatory pricing, a range of "tying" schemes, predatory disparagement of competitors, monopoly leveraging, and predatory preannouncement of products.

Should Microsoft sign the consent or lose in court, it would face a number of dramatic modifications to its business practices. Among them is the implementation of a "Chinese Wall" that would guarantee that any information not disclosed to the industry would also not be disclosed to Microsoft's internal developers.

"The rule would be whatever you tell your own developers you'd have to tell everyone else," said Bob Metcalfe, publisher of Infoworld and inventor of the Ethernet networking technology.

Forrester Research's Bluestein points out that with every new operating system release, Microsoft has an advantage since its developers have had information far in advance of everyone else in the industry. A case in point is Microsoft's current plans for its forthcoming operating system, code-named "Chicago" and due later this year.

In addition to "screwing up application developers if the release of information about Chicago isn't timely," Metcalfe said Microsoft is also holding the fate of operating system suppliers like IBM and Apple in its hands. "With Chicago, Microsoft is angling to shake loose OS/2," Metcalfe said. One of OS/2's major selling points is its compatibility with Windows, he said. If future versions of OS/2 are incompatible with Chicago, its sales will suffer dramatically. The same logic applies to Pink, the forthcoming OS from Taligent (the joint Apple/IBM company charged with creating a next-generation object-oriented OS).

Exclusive Dealing

Microsoft's competitors interpreted the company's long-standing practice of "per processor" licensing as an "exclusive dealing" scheme. Basically, in order to receive a volume discount on operating systems such as DOS and Windows, computer makers must agree to pay software royalties to Microsoft for every computer they ship, regardless of whether the computer is sold with any Microsoft software. Competitors argued to the DOJ that the result of this licensing practice is the closure of markets to would-be operating system innovators such as Taligent, Novell, and Sun Microsystems. As opposed to offering volume pricing, with a range of discounts being offered based on different volume levels, Microsoft's "per processor" licenses are an all or nothing deal, computer makers confirmed. You can sign up and pay royalties on every computer shipped, or you can buy the operating system one copy at a time, for considerably more.

"In order to consider an alternative operating system, a computer maker would have to be willing to pay twice for it," said a Zenith Data Systems source. "Everyone is already locked into paying royalties to Microsoft. If a better product came along, even if we wanted to use it, we couldn't."

"The way Microsoft licenses MS-DOS and Windows to original equipment manufacturers is the most efficient and cost-effective method we have found thus far for making our operating system technology broadly available to computer users at low prices," Neukom retorts. "Microsoft believes that its licensing practices are entirely legal and in no sense anti-competitive."

In addition to challenging Microsoft's "per processor" licensing policies, the DOJ plans to address a variety of alleged "tying" schemes. "Technological tying" was said to give Microsoft's own internal applications developers advantages that independent developers do not have in terms of access to information about forthcoming operating system software and technology. Under the category of "information tying," computer makers were allegedly threatened that they would not receive critical information on future product releases if they did not agree to pre-load both DOS and Windows on their computers, for example.

Microsoft also allegedly tied sales of its application software to operating system sales, sometimes offering discounts to those who agreed to bundle applications software on their computers. It also allegedly gave itself beneficial "hooks" over other developers by tying technology included in its operating systems, called undocumented calls, to code used secretly by its own application software and utility software developers.

"Microsoft is now in the process of defending its undocumented calls as 'trade secrets,'" said Gary Clow, president of Stac Electronics, whose company is engaged in an unrelated patent infringement suit against Microsoft. "This contradicts its earlier statements that it does not use undocumented code that others in the industry do not have access to."

"Microsoft does not engage in tying, nor has it done so in the past," counters Microsoft counsel Neukom.

Also high on the DOJ's list of Microsoft's alleged wrongdoings: "predatory disparagement" of competitors' products; creation of an appearance of the "incompatibility" of competing products when none exist (allegations include hooks in Microsoft's operating systems that throw up misleading "error" messages on the screen when a user is running competing applications software); and alleged practice of "nonlinear pricing."

The Clayton Act restricts companies from engaging in predatory pricing that drives competitors out of the market by selling products below the cost of production. In late 1993, Microsoft competitor Novell and its attorneys had, under civil investigative demand, provided the DOJ with evidence of Microsoft's tying sales of its operating systems to sales of its lackluster Windows for Workgroups software. Microsoft was allegedly attempting to coerce original equipment manufacturers into pre-loading Windows for Workgroups on their computers along with Microsoft DOS in exchange for a sharp price reduction in royalties. In some cases, Windows for Workgroups was being offered at a lower price than Windows.

"Microsoft's practices are those of a classical monopolist bent on preserving and extending its market power by unlawful means," documents submitted to the DOJ by Novell state.

"The record compiled to date shows serious harm to competition and consumers flowing from these practices," added Novell Chairman and CEO Ray Noorda, who has his own competitive ax to grind, but was one of the few CEOs willing to go on the record. "Microsoft has been abusing this market for years," he said, adding that if a consent order was reached that forced Microsoft to stop certain of its practices, "that would be a baby step in the right direction. The industry has already been irrevocably damaged."

Their allegations are clear: By squeezing off distribution at the original equipment manufacturers channel through predatory licensing schemes, and by squeezing out competition through predatory tying schemes, Microsoft was essentially locking up the operating system market and, by extension, the application market as well.

Another high-level executive at a well-known software company put it this way: "We were raped by Microsoft. Bill Gates did it personally. Introducing Gates to the president of a small company is like introducing Mike Tyson to a virgin. This has to be stopped."

Behind the Scenes

Changes at the antitrust division, bolstered by the financial and philosophical support of Reno and the Clinton administration, proved key to the Microsoft complaint moving forward again. When Bingaman was named by Bill Clinton last spring as the nation's top antitrust cop, she knew that a major overhaul of the division was in order. Picking up the Microsoft case served to show the world what she was made of. The woman whom The New York Times called "the most seasoned of pols," wife of a two-term Democratic senator, got the ball rolling - and fast. Some at the DOJ could barely believe their eyes. Feathers were being ruffled, but things were getting done.

Almost immediately upon her arrival at the DOJ, Bingaman made a lightning tour around town, surfacing in Congressional offices as well as making the rounds at the Office of Management and Budget. She gave graphic presentations, bolstered by blow-up charts. She was making her point well: The economy had more than quadrupled, but the size of the antitrust division had stayed the same since WWII.

As Bill Gates was meandering about the Comdex show in Las Vegas last November - having client dinners, giving his yearly speech to thousands of worshippers, and boogying at the Paladium and the Shark Club - Bingaman and her staff at the antitrust unit were rejoicing: They'd recently won $4.7 million from Congress to beef up the joint. The trustbusters were back in business.

But Bingaman was horrified when the staff presented her with a briefing book showing the antitrust unit's organizational chart and decision tree. The number of boxes that a case had to go through before a decision could be made was astounding. Bingaman undertook a major reorganization, effectively squashing a vertical reporting structure that had kept the top people uninformed.

"The new structure cuts down on wasted work," said Bingaman, in an interview with WIRED. "The problems were chain of command and vertical review." (Along with her staff, Bingaman declined to comment on the specifics of the Microsoft probe.)

Bingaman's reorganization created a new merger deputy position - filled by former section chief Steven Sunshine - enabled regulatory deputy Robert Litan to devote most of his efforts to Microsoft and other nonmerger cases. That is to say, Microsoft was his baby.

Litan had known Bingaman for ten years. The two had worked together at a Washington law firm. He held both a law degree and a PhD in economics. Prior to his arrival at the DOJ, Litan spent most of his time as an economist at the Brookings Institution, having scaled back his law practice at Powell Goldstein to part time.

The other deputy assistant attorney generals who have played a critical role in the Microsoft case were Richard Gilbert and Diane Wood. They helped Litan evaluate the economic and global impact, respectively, of pursuing a federal injunction against Microsoft. Gilbert, the economics deputy, was a technology buff and an expert in industrial organization and intellectual property issues. Diane Wood, a University of Chicago law professor, became deputy international affairs at the antitrust division in September.

Bingaman had put together a team to take on big antitrust cases, and she was encouraging them to do so. Microsoft became their first major prey. The staff was seeking to enlarge its complaint to include violations that affected the applications software market in addition to the operating system market - the core of the stalled FTC complaint.

"I think the truth is, antitrust enforcement is strongly supported on the Hill," Bingaman said. "Big segments of the American people support it, and the business community generally does."

Contrary to some reports in the press that her aggressive enforcement mission ran counter to Gore's information policy, Bingaman was well supported by the White House. "I'll tell you the truth. I've never had a problem with the White House at all in any of this. This is a figment of the press' [imagination] to me," Bingaman said.

At the same time, Attorney General Reno had the power to put a stop to any investigation or case at the antitrust division that she felt was inappropriate. Reno, in fact, was giving Bingaman all the resources she needed to succeed, including $1 million out of her own discretionary budget. And with the $4.7 million windfall from Congress, by early December Bingaman was preparing to hire about 30 new attorneys, 60 attorney assistants, and a slew of economists. A good portion of these resources would be used on the Microsoft case.

The Probable Outcome

Back in early December, Robert Litan and section chief Richard Rosen, who was overseeing the group of lawyers doing all the legwork on Microsoft, were envisioning the case in court.

The DOJ would not seek monetary damages from Microsoft, contrary to some speculation in the press. Instead, an injunction in federal court would be sought that would order Microsoft to stop certain behavior in the marketplace. Litan, Gilbert, and the others were well aware that if the case went to court - that is, if Microsoft refused to sign a consent decree - the company would be taking a big risk. Besides having to air its laundry in public, if Microsoft lost, the case could pave the way for a slew of private lawsuits.

"We are not in the business of attacking concentration for its own sake or impeding innovation for God-knows-what reason," Gilbert said. "It's very much a question of: Are there combinations or practices where we have good reason to believe they're interfering with innovation or delivering goods at the best prices? If we think that's going on, we'll challenge it."

Basically, competitors want a level playing field. If Microsoft wants to disclose information, then it should disclose to all, they argue. And if it chooses to keep certain operating system information as a "trade secret," then that information should also be kept secret from its own internal application developers.

Microsoft's competitors fear that if the Justice Department does not force Microsoft to change its behavior in the marketplace, Microsoft will "leverage" its monopoly position for an advantage in new markets spawned by the convergence of digital technologies. There will be new applications required for interactive television, for example, and Gates is already lining up control of that platform by putting Microsoft operating systems at the heart of set-top boxes and other new devices through alliances with TCI, Sega, and others. If Microsoft's licensing policies along the digital superhighway are the same as in the computer industry, competitors have plenty to fear.

Meanwhile, the staff is prepared for the following scenario: Litan calls Microsoft chief counsel Bill Neukom and Chairman Bill Gates into his office and informs them that the division is preparing to sue. They're offered a detailed consent order to sign. If Microsoft refuses to sign, within three weeks a lawsuit would be filed by the DOJ in federal court. The case could take years to get to trial.

If a consent agreement is reached, some negotiation on its terms is to be expected. Attorneys however, have been perusing the details of something called the Tunney Act (officially the Anti-trust Procedures and Penalty Act, approved in 1974) to make sure that the results would not merely be symbolic. The Tunney Act states that the public will have a chance to comment on any consent decree sought by the Department of Justice. Basically, Tunney throws any consent order into the public forum.

As of late January, Washington antitrust pundits were betting that Microsoft would sign a consent order. "Gates would have to be nuts if he didn't," said one Washington attorney.

So what really happens if Gates signs? What is this whole case about, anyway? Won't Microsoft continue to dominate the market? In the short term, the answer is yes, but a "level playing field" would do much to allow competitors like Taligent and even unknowns - future Microsofts - into the game. The result could be more competing operating systems, and a broader range of quality applications software as well.

"If you essentially disable Microsoft from using its licensing provision to keep out competitors of DOS and DOS follow-ons, you're going to have more and more competitors of DOS," said a lawyer with intimate knowledge of the case. "Instead of just DOS with its huge share of the market, if you've got three or four operating systems each having 25 or 30 percent of the market, you're going to provide a lot more incentive for those people to predisclose or disclose interface operations to everybody." The reason: The OS that talks to everyone wins. That's Taligent's strategy, and OS/2's as well.

Microsoft could refuse to sign, go to court, and win. Or the investigation could end up a political casualty, dismissed before it ever begins - always a possibility in fickle Washington. That's certainly the hope of Microsoft counsel Neukom. "We cannot comment on why the Department of Justice decided to begin its own investigation of Microsoft," he states. "You should bear in mind, however, that the Department of Justice quite frequently concludes following an investigation that claims of anti-competitive conduct are baseless."

Of course, there are plenty of people in Washington and elsewhere who would like the government to get out of the way and let markets take care of themselves. Washington insiders warn that when the DOJ publicly unveils its intentions, a political maelstrom may be unleashed. Microsoft is already lobbying folks at the Commerce Department, claiming that the case would seriously harm the economy (What's good for Microsoft is good for the USA...). However, high-level DOJ sources say the solid foundation of the case - born of the legal strength of the case and the relationship between Reno and Bingaman - is expected to withstand whatever political pressure may be brought to bear at the last moment.

"I don't think (squelching the case) would really serve the economy because we really do need to be concerned that antitrust allows innovation to proceed as rapidly as possible," Gilbert said. "Which sometimes means being concerned about certain types of agglomerations of power."

"There will be positive results out of all of this," said Deputy Assistant Attorney General Litan about Bingaman's reinvigoration of the antitrust division. "Janet Reno has very much delegated antitrust [decisions] to Anne. The extraordinary circumstance is if Anne would not get what she wanted."